“At the margin, it gives some hope that Australia too will continue to experience disinflation, but it is still too early to declare inflation dead, both in the US and here at home.”
Wages rise
Data on Wednesday showed Australia’s annual pace of wages to September grew at the fastest pace in 14 years due to a one-off sharp pay rise in aged care employees.
The wage price index gained 1.3 per cent, in line with forecasts and the biggest quarterly rise in the 26-year history of the series. Year-on-year, pay growth accelerated 4 per cent from 3.6 per cent, above market expectations.
The outcome, however, is unlikely to worry the RBA which has become less concerned about the prospect of a wages-fuelled inflationary spiral.
Bond futures still imply a very slim chance of an interest rate increase in December, ascribing an 8 per cent probability of another rate hike after last week’s lift to 4.35 per cent.
Traders are evenly divided about the next rate move, and price an around 50 per cent chance of an increase mid-next year. Before the US inflation data, that probability was 64 per cent.
The RBA expects pay growth to ease next year and inflation to return to its 2 per cent to 3 per cent target by mid-2025. But economists argue that unless productivity increases, the central bank’s timeline won’t be met.
“A hike in February is still plausible given the inflation outlook. The risk remains that the outlook for wages growth proves a challenge to the ‘last-mile’ of disinflation in Australia,” said Taylor Nugent, a senior economist at National Australia Bank.
Meanwhile, global bond yields nosedived after the US inflation report with traders wagering the next US interest rate move would be down.
US two-year yields, which are sensitive to rate expectations, tumbled 22 basis points to 4.82 per cent, the biggest daily fall since May. The benchmark US 10-year return, dropped 19 basis points to 4.44 per cent, the worst one-day decline since March.
Rate cut sceptics
Fed fund futures are fully priced for a rate cut as early as June next year, from July before the data. They imply 70 basis points worth of easing in 2024.
Scott Solomon, bond manager at $US1.3 trillion asset manager T. Rowe Price, argued that the market was probably off the mark in terms of rate cuts.
“Do I think that the Fed is any closer to cutting? Absolutely not. The concern is that we end up with another acceleration in the economy because there’s still ample liquidity out there,” he said during a visit to Sydney.
“The Fed seems eager to announce that the job’s done, but they need to be more careful about that,” said the US-based fund manager who oversees a $US10 billion bond portfolio including a $600 million fund in Australia.
He expects the Fed to be on an extended rate pause and is unlikely to ease monetary policy next year.
“We need to see economic data significantly rolling over, and we haven’t seen that yet.” The biggest risk, he added, was that the next interest rate move is higher.
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